Docstoc

FORECASTING

Document Sample
FORECASTING Powered By Docstoc
					FORECASTING
WHAT IS FORECASTING?
FORECASTS ARE STATEMENTS ABOUT THE
FUTURE, SPECIFYING THE SALES VOLUMES
          TO BE ACHIEVED AND
  EQUIPMENT/MATERIAL AND OTHER
   INPUTS REQUIRED TO ACHIEVE THE
           ESTIMATED SALES.
  IT IS ALSO A SYSTEMATIC EFFORT TO
     ANTICIPATE FUTURE EVENTS OR
              CONDITIONS.
PRINCIPLES OF FORECASTING
   FORECASTS HAVE FOUR MAJOR
        CHARACTERISTICS :

1. FORECASTS ARE USUALLY WRONG –
  THEY ATTEMPT TO LOOK INTO THE
 UNKNOWN FUTURE AND, EXCEPT BY
SHEER LUCK,WILL BE WRONG TO SOME
DEGREE. ERRORS ARE INEVITABLE AND
        MUST BE EXPECTED.
  2. EVERY ERROR SHOULD INCLUDE AN
 ESTIMATE OF ERROR – SINCE FORECASTS
 ARE EXPECTED TO BE WRONG, THE REAL
 QUEST5ION IS “BY HOW MUCH?” EVERY
FORECAST SHOULD INCLUDE AN ESTIMATE
    OF ERROR OFTEN EXPRESSED AS A
 PERCENTAGE (+/-) OF THE FORECAST OR
  AS A RANGE BETWEEN THE MINIMUM
        AND MAXIMUM VALUES.
ESTIMATES OF THIS ERROR CAN BE MADE
    STATISTICALLY BY STUDYING THE
  VARIABILITY OF DEMAND ABOUT THE
          AVERAGE DEMAND.
 3. FORECASTS ARE MORE ACCURATE FOR
FAMILIES OR GROUPS - THE BEHAVIOR OF
     INDIVIDUAL ITEMS IN A GROUP IS
  RANDOM EVEN WHEN THE GROUP HAS
VERY SUBTLE CHARACTERISTICS. E.G., THE
 MARKS FOR INDIVIDUAL STUDENTS IN A
CLASS ARE MORE DIFFICULT TO FORECAST
 ACCURATELY THAN THE CLASS AVERAGE.
  HIGH MARKS AVERAGE OUT WITH LOW
                 MARKS.
 THIS MEANS THAT FORECASTS ARE MORE
ACCURATE FOR LARGE GROUPS OF ITEMS
THAN FOR INDIVIDUAL ITEMS IN A GROUP.
4. FORECASTS ARE MORE ACCURATE FOR
   NEARER TIME PERIODS – THE NEAR
FUTURE HOLDS LESS UNCERTAINTY THAN
  THE FAR FUTURE. MOST PEOPLE ARE
MORE CONFIDENT IN FORECASTING WHAT
  THEY WILL BE DOING OVER THE NEXT
 WEEK THAN A YEAR FROM NOW. AS THE
SAYING GOES ‘TOMORROW IS EXPECTED
    TO BE PRETTY MUCH LIKE TODAY’.
ANYTHING THAT CAN BE DONE TO REDUCE
  LEAD TIME WILL IMPROVE FORECAST
             ACCURACY.
COLLECTION AND PREPARATION
          OF DATA
   FORECASTS ARE USUALLY BASED ON
HISTORICAL DATA USING JUDGEMENT OR
 STATISTICAL TECHNIQUE. TO GET GOOD
    DATA, THREE PRINCIPLES OF DATA
     COLLECTION ARE IMPORTANT.
1. RECORD DATA IN THE SAME TERMS AS
 NEEDED FOR THE FORECAST – APPLES
          WITH APPLES ETC.
2. RECORD THE CIRCUMSTANCES RELATING
 TO THE DATA - DEMAND IS INFLUENCED
   BY PARTIUCULAR EVENTS, AND THESE
 SHOULD BE RECORDED ALONG WITH THE
             DEMAND DATA.
3. RECORD THE DEMAND SEPARATELY FOR
 DIFFERENT CUSTOMER GROUPS – EACH
     HAS ITS OWN CHARACTERISTICS ,
     NUANCES AND REQUIREMENTS.
FORECASTING TECHNIQUES
  THERE ARE MANY FORECASTING
METHODS, BUT THEY CAN BE USUSALLY
CLASSIFIED INTO THREE CATEGORIES :

     QUALITATIVE TECHNIQUES
      EXTRINSIC TECHNIQUES
      INTRINSIC TECHNIQUES
    QUALITATIVE TECHNIQUES – ARE
  PROJECTIONS BASED ON JUDGEMENT,
INTUITION, AND INFORMED OPINIONS. BY
  NATURE THEY ARE SUBJECTIVE. SUCH
 TECHNIQUE IS USUALLY USED BY SENIOR
            MANAGEMENT.
     WHEN FORECASTING FOR A NEW
PRODUCT, THERE IS NO HISTORICAL DATA.
 IT IS BASED ON MARKET RESEARCH AND
  TEST MARKETING. THERE ARE SEVERAL
    OTHER METHODS OF QUALITATIVE
FORECASTING – ONE OF THEM IS DELPHI
     METHOD WHICH USES A PANEL OF
 EXPERTS WHO GIVE THEIR OPINIONS ON
        WHAT IS LIKELY TO HAPPEN.
EXTRINSIC TECHNIQUE – ARE PROJECTIONS
 BASED ON EXTERNAL INDICATORS WHICH
      RELATE TO THE DEMAND FOR A
   COMPANY’S PRODUCT. EXAMPLES OF
  SUCH DATA ARE HOUSING OPERATIONS,
  BIRTH RATES AND DISPOSABLE INCOME.
THEY CAN ALSO BE TERMED AS ECONOMIC
              INDICATORS.
 EXTRINSIC FORECASTING IS MOSTLY USED
IN BUSINESS AND PRODUCTION PLANNING
     RATHER THAN FORECASTING OF
         INDIVIDUAL END ITEMS.
    INTRINSIC TECHNIQUES – USE
HISTORICAL DATA TO FORECAST. THESE
DATA ARE USUALLY RECORDED IN THE
     COMPANY AND ARE READILY
 AVAILABLE. INTRINSIC FORECASTING
   TECHNIQUES ARE BASED ON THE
ASSUMPTION THAT WHAT HAPPENED
  IN THE PAST WILL HAPPEN IN THE
              FUTURE.
  SINCE THERE IS NO CRYSTAL BALL TO
PREDICT THE FUTURE, THE BEST GUIDE TO
 THE FUTURE IS WHAT HAPPENED IN THE
                 PAST.
SOME OTHER TECHNIQUES OF
   FORECASTING ARE :

    AVERAGE DEMAND.

    MOVING AVERAGES.

    CUSTOMER TRENDS

MARKET/COMPETITVE TRENDS
 DEMOGRAPHICAL CHANGES.

CONSUMER BEHAVIOR CHANGES.

       GUT FEELING.
     OTHER TECHNIQUES USED BY
  PROFESSIONAL FORECASTERS ARE :

    EXPONENTIAL SMOOTHING – IS A
TECHNIQUE WHERE A NEW DATA IS GIVEN
ANY WEIGHT AND IS REPRESENTED BY THE
   GREEK LETTER ALPHA. IT IS ALWAYS
 EXPRESSED AS A DECIMAL FROM 0 – 1.0.
 THE FORMULA FOR CALCULATING THE
          NEW FORECAST IS :
NEW FORECAST = (a)(LATEST DEMAND) +
      (1-a)(PREVIOUS FORECAST)
  MEAN ABSOLUTE DIVISION – WHERE
MEAN IMPLIES AN AVERAGE; ABSOLUTE
 MEANS WITHOUT REFERENCE TO PLUS
AND MINUS; AND DEVIATION REFERS TO
 ERROR. THIS MEASURES THE FORECAST
ERROR PRIOR TO REVISING FORECAST OR
        HELPING IN PLANNING.
          THE FORMULA IS :
 MAD = SUM OF ABSOLUTE DEVIATIONS
         NUMBER OF OBSERVATIONS
 P/D RATIO – WHERE “P” IS PRODUCTION
LEAD TIME AND “D” DEMAND LEAD TIME.
    THE TRADITIONAL WAY TO GUARD
      AGAINST INHERENT ERROR IN
   FORECASTING IS TO INCLUDE SAFETY
STOCK IN INVENTORY. THIS WILL INCREASE
COSTS ON EXTRA INVENTORY. THE OTHER
    WAY IS TO MAKE MORE ACCURATE
             PREDICTIONS.
         THIS IS DONE BY :

1. REDUCE “P” TIME. THE LONGER THE
   “P” TIME, THE MORE CHANCES OF
 ERROR. IDEALLY “P” SHOULD BE LESS
              THAN “D”.
 2. FORCE A MATCH BETWEEN P AND D –
MOVING IN THIS DIRECTION CAN BE DONE
            IN TWO WAYS :
  A. MAKE THE CUSTOMER’S “D” TIME
   EQUAL TO YOUR “P” TIME. THIS IS
  COMMON WITH CUSTOM PRODUCTS
 WHEN THE MANUFACTURER MAKES THE
     PRODUCT ACCORDING TO THE
     CUSTOMER’S SPECIFICATIONS.

 B. SELL WHAT YOU FORECAST – THIS WILL
HAPPEN WHEN YOU KNOW YOUR MARKET.
3. SIMPLIFY THE PRODUCT LINE – THE
  MORE VARIETY I8N THE PRODUCT
LINE, THE MORE ROOM FOR ERROR.
 4. STANDARDIZE PRODUCTS AND
 PROCESSES - THIS MEANS THAT
:CUSTOMIZATION” OCCURS CLOSE
  TO FINAL ASSEMBLY. THE BASIC
COMPONENTS ARE IDENTICAL, OR
 SIMILAR FOR ALL COMPONENTS.
5. FORECAST MORE ACCURATELY – MAKE
FORECASTS USING A WELL THOUGHT OUT
    AND WELL CONTROLLED PROCESS.
 FORECASTING IS AN INEXACT SCIENCE
THAT IS, NONETHELESS, AN INVALUABLE
 TOOL IF THE FOLLOWING ARE KEPT IN
               MIND :
● FORECASTS SHOULD BE TRACKED.

● THERE SHOULD BE A MEASURE OF
   REASONABLENESS OF ERROR.
 ● WHEN ACTUAL DEMAND EXCEEDS OR
 DECREASES THE REASONABLENESS OF
 ERROR, AN INVESTIGATION SHOULD BE
MADE TO DISCOVER THE CAUSE OF ERROR.
 ● IF THERE IS NO APPARENT CAUSE OF
 ERROR, THE METHOD OF FORECASTING
SHOULD BE REVIEWED TO SEE IF THERE IS
      A BETTER WAY TO FORECAST
THANK YOU.

				
DOCUMENT INFO
Shared By:
Categories:
Stats:
views:37
posted:8/19/2012
language:Unknown
pages:41